CONTRACT ETD/2008/IM/H1/53

Transcription

1 CONTRACT ETD/2008/IM/H1/53 IMPLEMENTED BY FOR DBB LAW COMMISSION EUROPEENNE Pre-insolvency/early intervention, Reorganization measures and winding up proceedings of banking groups National Report PORTUGAL By Luis Nobres GUEDES

2 I - Background information... 1 II - National regulation ) Differences between pre-insolvency/early intervention measures and reorganization/winding-up proceedings ) Pre-insolvency and early intervention system ) Formal reorganization measures and winding up rules ) Recent cases For the purpose of this questions: - "reorganization measures" shall mean measures which are intended to preserve or restore the financial situation of a credit institution and which could affect third parties' pre-existing rights, including measures involving the possibility of a suspension of payments, suspension of enforcement measures or reduction of claims; - "winding-up proceedings" shall mean collective proceedings opened and monitored by the administrative or judicial authorities of a Member State with the aim of realising assets under the supervision of those authorities, including where the proceedings are terminated by a composition or other, similar measure; - pre-insolvency/early intervention shall mean any intervention except and before reorganization measures and winding-up proceedings I - Background information In November 2005, the European Banking Committee identified five areas (liquidity risk management, crisis management, lending of last resort, deposit guarantee schemes and reorganization measures and winding-up proceedings) as part of the supervisory arrangements review to be performed according to Article 156 of Directive 2006/48/EC. Consequently, the Commission initiated the review process of the Directive on the 1

3 - reorganization and winding up of credit institutions (2001/24/EC) in August Under Directive 2001/24/EC, where a credit institution with branches in other Member States is wound up or reorganised, the winding up or reorganization measures are initiated and carried out under a single procedure by the authorities of the Member State where the credit institution has been authorised (known as the home Member State). This procedure is governed by the law of the home Member State. This approach is consistent with the principle of home Member State supervision pursuant to the EU Banking Directives. The Directive does not aim at harmonising national legislation, but at ensuring mutual recognition of Member States' reorganization measures and winding up proceedings as well as the necessary cooperation between authorities. Due to the mere coordinating nature of the Directive, Member States have different reorganization measures and winding up proceedings. Consequently, insolvency proceedings for credit institutions differ. Some Member States use the same general company and insolvency law for the reorganization measures and winding up of credit institutions as for other businesses, while others have special reorganization measures for credit institutions. The Directive covers only the insolvency of branches of credit institutions in other Member States, but does not cover subsidiaries of banking groups in other Member States. Directive 2001/24/EC is limited to procedural aspects concerning each legal entity within a cross border banking group. This limited scope does not allow to take into account synergies within such a group, which may benefit all creditors in case of reorganization measures. This lack of group-wide approach to winding up and reorganization measures could lead to the failure of subsidiaries or even the group, which could otherwise have been reorganised and remained solvent in whole or part. The October 2007 ECOFIN strategic roadmap for strengthening EU arrangements for financial stability requests the Commission For this purpose, the Commission carried out a public consultation (see also point 6 of the technical specifications). This consultation seeks clarification on: whether Directive 2001/24/EC on the reorganization and winding up of credit institutions leaves gaps and ambiguities which need to be removed, and issues related to the treatment of cross-border banking groups (i.e. parent credit institutions with subsidiaries in other Member States) in a crisis situation or under reorganization measures. The purpose of the public consultation was to take stock of legal frameworks in the different Member States relating to the reorganization and winding up of banking groups. The consultation also aimed at identifying problems preventing a smooth crisis management and a smooth resolution process. 2

4 - The focus of Commission's work is on possible reorganization of banking groups in contrast to ring fencing legal entities (and apply national resolution tools). II - National regulation Please provide a presentation of your national regulation (law, cases, ) and attach it as Annex A the relevant legal texts and cases summarized in English. The main focus of the work is how to find solutions in a cross border case of a banking group for both pre-insolvency/early intervention systems and formal insolvency (reorganization and winding up measures). Please formulate your answers in light of it. 3

5 - Differences between pre-insolvency/early intervention measures and reorganization/winding-up proceedings 1) Differences between pre-insolvency/early intervention measures and reorganization/winding-up proceedings 1.1 Please provide precise information about the key moments during or preceding a banking crisis: Moment/event at which competent authorities trigger the requirement on a credit institution to take the necessary steps to redress the situation in order to meet minimum requirements in the Directive and to implement the measures referred to in Article 136(1) CRD. According to Portuguese Law, such measures can be implemented, mainly, when (i) own funds requirement, (ii) rules regarding reserves or (iii) the rules regarding insolvency ratios are not met Moment at which Member States trigger early intervention measures According to Portuguese Law, this happens when the credit institution notifies the Bank of Portugal that some supervisory rules are not met or when as consequence of the information disclosed to the Bank of Portugal, it is detected that the rule referred above are not met. Moment at which insolvency is declared. Please be advised that according to Insolvency Law, when a company cannot fulfil its due obligations it must present herself before Court in order to file an Insolvency Procedure (Article 3, number one of the Insolvency Code). Nevertheless, Insolvency can only be declared following the revocation of the concerned credit institution authorization under Decree-Law no 199/2006. After such revocation, a Court should decide on the Insolvency and its terms. Moment at which the Deposit Guarantee Scheme (DGS) is triggered Are the following criteria used in order to determine the moments you have described: The credit institution possesses adequate resources for it to be able to continue activities. The credit institution maintains adequate suitability for it to be able to continue activities The credit institution does not comply anymore with the solvency ratio The credit institution is facing liquidity difficulties 4

6 - These criteria are only used indirectly, once there are specific rules regarding own funds requirements of credit institutions. Please find attached hereto Notice 12/92 of the Bank of Portugal. These criteria are only used indirectly, once there are specific rules regarding own funds requirements of credit institutions. Please find attached hereto Notice 12/92 of the Bank of Portugal. 2) Pre-insolvency and early intervention system 2.1 Pre-insolvency/early intervention systems tailored for banks Are there, in your national legislation, special pre-insolvency/early intervention systems that are tailored for banks? Yes X No 2.2 Pre-insolvency/early intervention systems that can be applied to banks If it is not the case, is there in your legislation, any pre-insolvency/early intervention system that can be applied to banks X No 2.3 Conditions and features Please explain briefly the systems currently available in your Member states. Description Can it be commenced on a voluntary basis and/or does it have to be ordered by the authorities? XVoluntary basis Ordered by the authorities Description Banks can voluntarily require the revocation of its authorization, commencing therefore the winding-up proceeding What are the legal and economic conditions that must be met for these regimes to be prompted and applied? 5

7 - Pre-insolvency and early intervention system Is a judicial decision which states that the legal and economic conditions are met necessary? No. All recovery measures may be imposed administratively by the Bank of Portugal. 2.4 Powers and responsibilities of the intervening authorities For the execution of these measures, what are the powers of (i.e appointment of a negotiator in charge of finding solutions to the difficulties faced; organization of the negotiations with the main creditors of the bank; shares freeze; capital increase in derogatory conditions; forced transfer of the subsidiary; transfer of assets enabling the isolation of the risky activities; stay of actions (full or partial) of payment actions; rescheduling of the main debts due for payment) X the nominated administrator Description of the powers The responsabilities may vary depending of the scope of the appointment made by the Bank of Portugal X the national bank Description of the powers According to article 139, number of RGICSF, in order to protect the interests of depositors, investors and other creditors and to safeguard the normal operation of the money, financial and foreign exchange markets, Banco de Portugal may, in relation to credit institutions having their head office in Portugal, take some extraordinary measures. The Bank of Portugal can determine the following recovery measures (article 141 of RGICSF): a) Submission, by the relevant institution, of a recovery plan; b) Restraints to the rendering of certain activities; c) Restraints to granting of credit and the application of funds in certain assets, namely in operations involving its affiliates or the holding company of those affiliates; d) Restraints to reception of deposits, attending to its types and its remuneration interest rate; e) Imposition of the implementation of special provisions; f) Forbiddance or limitation to dividends distribution; g) Subjection to previous authorisation of the Bank of Portugal relating to certain operations or acts; In any of the situations referred to in the foregoing Article, Banco de Portugal may require the institution in question to prepare a financial recovery and reorganisation plan, to be submitted to the Bank for approval within a period set by the latter (article 142 of RGICSF). 6

8 - Pre-insolvency and early intervention system Description of the powers See powers described above (national bank, that is the Bank of Portugal is the national bank as well as the banking supervisory authority. X the courts Description of the powers X Ministry of Finance Description of powers The most radical decision is the nationalization of a bank. For instance, Decree-Law no. 62-A/2008, of November 11 has determined the nationalization of one hundred percent of shares representing the share capital of Banco Português de Negócios, S.A. as a consequence of some transactions made by a Cape Verde subsidiary of this Bank, causing a loss of approximately million Euros. Allegedly, Banco Português de Negócios acquired the holding of this Cape Verde subsidiary and did not informed the Bank of Portugal. Therefore, the accountability referring to this subsidiary was not included in the consolidated accounts submitted to the Bank of Portugal. Currently, Banco Português de Negócios, S.A. has been transformed in a public company ( empresa pública ), id est a company held by the Portuguese State. The new by-laws of this Bank currently a State held company were published in the Diário da República on January, 6 Description of powers For the execution of these measures (or the lack of decision to set these measures), what are the responsibilities of: e banking supervisors Description of the responsibilities 7

9 - Pre-insolvency and early intervention system 2.5 Confidentiality Which measures are confidential and which measures must be made public? Both recovery measurements imposed by the Bank of Portugal and the insolvency proceeding are public. 2.6 Powers and responsibilities of the intervening authorities Can the intervening authorities reduce the rights of the stakeholders (creditors, shareholders, deposit holders)? Is there in your legislation a judicial control of those measures? Please explain. How are handled the rights of the following stakeholders in the execution of this kind of measures? -Shareholders -Creditors -Employees -Deposit holders Description In what concerns shareholders, it must be stressed out that if a credit institution is nationalized, they are entitled to a compensation based on the value of net assets of the nationalized institution (article 4, number 2 of the Annex of Decree- Law 62-A/2008). To this extent, when a Bank is nationalized its share capital is transferred to the state, which means that the shareholders will only be entitled to an indemnification, if such indemnification is due. Besides this aspect, shareholders may enforce judicial proceedings against the credit institution shareholders. In what concerns creditors, there must be made a distinction, whether there is an Insolvency Proceeding ongoing or not: if there is no Insolvency Proceeding filed, the transferor and the transferee must analyse the transfer of assets in order to evaluate if it can create an Insolvency situation, i.e., a situation where a company cannot fulfil its obligations. If an Insolvency Proceeding is already filed, the transfer of assets is subject to authorisation by the legal liquidator. Moreover, if we are dealing with a Bank and there are recovery measures being implemented, the transfer of assets may be subject to the previous authorisation of the Bank of Portugal. Employees can enforce judicial proceeding in order enforce the liability of the company and its managers in what concerns credits arising employment contracts due for more than 3 months. Company s which are in a group or dominion relationship are also jointly liable for these credits (articles 378 and 379 of the Labour Code). 8

10 - Pre-insolvency and early intervention system In what concerns deposit holders, under Portuguese Law there is a Fund to Guarantee Deposits ( Fundo de Garantia de Depósitos ), which aims to ensure the reimbursement of deposits made in the credit institutions which adhere to this fund. Nevertheless, deposits owned by companies in a dominion or group relationship with the participant credit institution are not covered by this Fund (article 165, item f) of RGICSF). The Fund is mandatorily participated by the following institutions (Article 156, number 1 of RGICSF): a) Credit institutions with its head office in Portugal, duly authorised to receive deposits, b) Credit institutions with its head office in a country not located in a Member State of the European Union, in what concerns the deposits received via its affiliates in Portugal, except if those deposits are covered by a guarantee system in its home country considered equivalent by the Bank of Portugal, and without prejudice to eventual agreements in this issue; c) Until December 31, 1999, the credit institutions referred in Annex III of Directive 94/19/EC, in what concerns the deposits received via its affiliates in Portugal. Can intervention decisions override shareholder s rights in the scope of these measures? XYes Description As stated before, if nationalization occurs, shareholders rights are completely overridden. 2.7 Relation with the formal insolvency proceedings What is the relation of pre-insolvency/early intervention systems with formal insolvency legislation? How do they interact? Is there in your legislation any special effect of the pre-insolvency/early intervention measures on special contracts (set off, netting for example)? Is there in your legislation any specific financing system for banks under preinsolvency/early intervention? No 9

11 - Pre-insolvency and early intervention system Can the deposit guarantee scheme be used to finance the pre-insolvency measures? Under Portuguese Law, the deposit guarantee scheme is construed only to protect the deposit holders. 2.8 Group aspect and Cross-border situations In a national context (when both the parent company and the subsidiaries are located in your Member state), do the pre-insolvency measures apply to the subsidiaries? Do the systems you have described above apply to cross-border situations (on which legal basis, i.e territoriality or universal principles)? How would a cross border case be managed in the following cases: N/A - When the ailing bank in your Member state is the subsidiary of a parent company located in another Member state? N/A - When the ailing bank in your Member state is the parent company of one or several subsidiary located in another Member state? N/A - When the ailing bank in your Member state is the subsidiary of a parent company located in a third country? N/A - When the ailing bank in your Member state is the parent company of one or several subsidiary located in a third country? Is there in your legislation state a specific pre-insolvency/early intervention created for cross border situations (please consider both subsidiaries and branches separately) 10

12 - Pre-insolvency and early intervention system N/A How does (or would) your national legislation deal with the cross-border aspects (are there situations where the Law of another Member state is applied) in the case of subsidiaries, not branches? According to article 3.º, number 1 of the Commercial Companies Code, commercial companies have as personal law the Law of the State where its principal and effective head-office is located. In what concerns insolvency proceedings, the Insolvency Code states as a general principle that, except as otherwise foreseen in the Code, the insolvency proceeding and its effects are governed by the Law of the state where the proceeding is enforced (article 276 of the Insolvency Code). How does your court deal with a conflict with another Member states Law: when there is a divergence between both Laws, can an agreement be concluded under the control of your national judge? According to article 288, number 1 of Insolvency Code, the insolvency declaration in a foreign proceeding shall be acknowledged in Portugal except if: a) the court s competence or the competence of the foreign authority is not base on the rule set forth in article 7 (which states that the Court located in the head office of the insolvent company is competent to decide the case) or similar connection criteria; b) the acknowledgment conducts to a result contrary to the fundamental principles of the Portuguese juridical legal system; 2.9 Efficiency of those proceedings Do you think the measures you have described above provide for optimal response in order to deal with problems in an ailing cross-border bank (please explain)? If these proceeding are enforced, namely investigations and audits to credit institutions subject to the supervisory powers of Bank of Portugal in a thorough way, financial health of credit institutions, namely solvency ratios and own funds requirements, can be ensured. Are there changes recently adopted or being discussed in your legislation? No 11

13 - Formal reorganization measures and winding up rules 3) Formal reorganization measures and winding up rules 3.1 General question Can you briefly explain what types of insolvency systems currently apply in your Member states (please briefly explain the differences if there are several)? According to Portuguese Law, insolvency is declared by courts. Please be advised that Decree-Law no 199/2006 has transposed Directive 2001/24/EC of the European Parliament and of the Council of 4 April 2001 on the reorganisation and winding up of credit institutions and, according to this Decree-Law the winding up of a credit institution may be compulsory or voluntary. Where a voluntary winding up occurs, any project of a voluntary winding-up of a credit institution shall be communicated to the Bank of Portugal with at least 90 days. Notice from the date of its effectiveness (article 5.º, number 2 of Decree- Law 199/2006 and article 35-A, number 1 of RGICSF). A compulsory winding up occurs only where the authorization of the concerned bank is revoked (article 5.º, number 2 of Decree-Law 199/2006). In these cases the rules contained in the Insolvency Code shall apply (article 8.º, number 1 of Decree-Law 199/2006). The cancellation of the authorization has the force of an insolvency declaration (article 8.º, number 2 of Decree-Law 199/2006), but it has to be homologated by a judge in order to determine its legality (article 9.º, number 1 of Decree-Law 199/2006). After this occurs, the judge, upon proposal of the Bank of Portugal, shall appoint a legal liquidator or a liquidation commission (article 10.º, number 1 of Decree- Law 199/2006) 3.2 Definition and scope of reorganization measures What do reorganization measures mean in practice in your Member state? (in general and for banks especially)? The Bank of Portugal can determine the following recovery measures (article 141 of RGICSF): a) Submission, by the relevant institution, of a recovery plan; b) Restraints to the rendering of certain activities; c) Restraints to granting of credit and the application of funds in certain assets, namely in operations involving its affiliates or the holding company of those affiliates; d) Restraints to reception of deposits, attending to its types and its remuneration interest rate; e) Imposition of the implementation of special provisions; f) Forbiddance or limitation to dividends distribution; 12

14 - Formal reorganization measures and winding up rules g) Subjection to previous authorisation of the Bank of Portugal relating to certain operations or acts; Please be advised that the implementation of the aforesaid measures does not prevent the application of fines to the relevant credit institutions neither the commencement of judicial proceedings against the credit/institution and/or the members of its corporate bodies. When a credit institution is unable to fulfil its obligations or runs the risk of being unable to fulfil them, the management or auditing board shall forthwith inform Banco de Portugal (article 141, number 1 of RGICSF) Please be advised that this measures can be applied in both early intervention and crisis situations. Nevertheless, once such measures may in fact alter the management of a credit institution, all actions must be adopted according to the principle of proportionality. This means that if an irregular conduct is detected, the supervisory authorities should recommend credit institutions to correct such conduct and only if this not happens, the recovery measures should be adopted. This is due to the fact that the recovery measures are considered extraordinary and, therefore, its application must be weighted. Moreover, in any of the situations referred to in Article 141 of RGICSF, Banco de Portugal may require the institution in question to prepare a financial recovery and reorganisation plan, to be submitted to the Bank for approval within a period set by the latter. (article 142, number 1 of RGICSF). To this extent, Banco de Portugal may lay down the conditions it deems fit for the acceptance of the financial recovery and reorganisation plan, in particular a capital increase or reduction, and the disposal of shareholdings and other assets (article 142, number 2 of RGICSF) and if such measures are not approved by the shareholders or involve such large amounts that their implementation may be jeopardized, and if a serious risk exists that the institution may not be able to fulfil its commitments, especially regarding the security of the funds entrusted to it, the Banco de Portugal may present an intervention programme. This programme may, inter alia, define the necessary capital increase and, should it be the case, determine that it should be preceded by the absorption of the losses of the institution by the relevant positive items of its own funds (article 142.º, number 3 of RGICSF) The measures envisaged within the framework of the intervention programme shall include the financial recovery and reorganisation plan envisaged in paragraph 1, under the conditions set forth by the Banco de Portugal, as well as the time frame of such intervention and a reshuffle of the respective corporate bodies, if deemed adequate (article 142., number 4 of RGICSF) and within the framework of the intervention programme envisaged in the foregoing paragraph, Banco de Portugal may invite the Deposit Guarantee Fund or other institutions to cooperate in the reorganisation process, in particular, through the granting of adequate monetary or financial support, or of their participation in the capital increase defined in paragraph 3 above, being incumbent upon the Bank to direct and define this cooperation in terms of time frame (article 142, number 5 of RGICSF). In the course of the reorganisation process, Banco de Portugal may, at any time, call a general meeting of sharecholders, at which it may present proposals (article 142, number 6 of RGICSF) and if the conditions set by Banco de Portugal or the proposals, which it presents, not be accepted, authorisation for the 13

15 - Formal reorganization measures and winding up rules exercise of the institution s activity may be withdrawn (article 142, number 7 of RGICSF). Please be also advised that Banco de Portugal may appoint one or more interim members of the board to the credit institution in the following instances (article 143.º, number 1 of RGICSF): (a) (b) (c) (d) When the institution is at risk of suspending payments; When the institution is in a situation of financial distress which, on account of its size or duration, poses a serious risk to solvency; When, for whatever reason, the administration fails to provide guarantees of prudent activity, seriously jeopardizing the interests of creditors; When inadequacies in the organisation of accounting or in internal control procedures are so serious as to render impossible a proper assessment of the institution s financial situation. The members of the board appointed by Banco de Portugal shall, in addition to the powers and duties conferred by law and by the articles of association upon members of the management board, have the following powers and duties (article 143, number 2 of RGICSF): (a) (b) (c) (d) (e) (f) (g) To veto decisions of the general meeting and, where relevant, of the bodies referred to in paragraph 3 of this Article; To call the general meeting; To draw up, as rapidly as possible, a report on the financial situation of the institution and on its causes and to submit it to Banco de Portugal, accompanied by the opinion of the auditing commission, if one has been appointed. Moreover, with the appointment of the interim members of the board, Banco de Portugal may suspend, in whole or in part, the management board, the general council and any other bodies with similar functions (article 143, number 3 of RGICSF). What are the conditions for commencing reorganization measures (for banks especially)? These regime applies when the (i) own funds requirement, (ii) rules regarding reserves or (iii) the rules regarding insolvency ratios are not met. According to article 96, number The own funds may not fall below the amount of the initial capital required ( ). Please find attached hereto Notice 12/92, which develops rules regarding own funds. In what concerns reserves, according to article 97, number 1 and 2 of RGICSF a fraction of not less than 10% of the net profits of a credit institution for each fiscal year shall be earmarked for the building up of a legal reserve, up to an amount equal to the capital stock or to the sum of its set up free reserves or the carried forward results, if higher. Furthermore, credit institutions shall also build up special reserves to strengthen their net worth or to cover losses that their profit and loss account cannot support Who can initiate a reorganization measures (in general and for banks especially)? 14

16 - Formal reorganization measures and winding up rules Both credit institutions can voluntarily require the revocation of its authorization or the Bank of Portugal compulsorily. Are banks treated specifically in insolvency legislation (are there specific rules for either reorganization measures or winding up proceeding)? Yes, RGICSF foresees recovery measures and Decree-Law nº 199/2006 foresees rules regarding winding-up. 3.3 Relations between reorganization measures and winding up Are the triggering events defined by laws for both reorganization and winding up measures or it is up to the courts to decide? Explain The courts shall decide insolvency proceedings after the failure of recovery measures imposed by the Bank of Portugal. It is a rather complex proceeding. Please find a brief description: When Insolvency proceeding is commenced, the sale of assets must be authorised by the judicial liquidator, who is the person in charge of the management of the insolvent mass further to an insolvency declaration. When deciding the destiny of assets involved in the Insolvency Proceeding, the Court shall make a graduation of the credits, in order to settle the ranks of the secured and unsecured creditors. Besides special securities, Portuguese law foresees several creditor s preferential claims, namely credits related to taxes and credits related to employees wages. According to the current legislation, insolvency is wilful when the debtor or its directors, as consequence of its conduct, have created or augmented the consequences of the insolvency in the previous 3 years before the insolvency procedure is filed. Moreover, all acts performed in the four previous years to an insolvency procedure can be terminated in order to allow that the assets subject to those acts can be affected to the assets belonging to the bankruptcy assets ( massa insolvente ) article 120, number 1 of the Insolvency Code. Additionally, please be advised that the Portuguese Insolvency Law foresees that the parties of an agreement, namely transfer of assets, cannot foresee that an insolvency is (i) a condition subsequent attributed to the one of the parties or (ii) grant to that counterparty a indemnification right. If this happens, the clause shall be considered null and void. (Article 119 of the Insolvency Code) Please be advised that the Insolvency Code foresees the concept of subordinated credits, which shall be graduated after all the remaining insolvency credits. These are the foreseen subordinated credits (Article 48 of the Insolvency Code ): 15

17 - Formal reorganization measures and winding up rules a) credits held by persons especially connected with the debtor, if the special connection already existed in the moment of the acquisition, and by those to which they have been transferred in the 2 previous years before the commencement of the Insolvency Proceeding; b) non subordinated credit interests created after the insolvency declaration, except for credits secured by a real security and general preferred credits until the value of the respective assets; c) credits whose subordination has been agreed by the parties; d) credits having as an object free obligations from the debtor; e) credits over the insolvency that go for a third party not acting in good faith, as a consequence of the resolution in favour of the Insolvency assets; f) interests of subordinated credits created after the insolvency declaration; g) credits over shareholders loans. 3.4 Power and authorities of the authorities intervening Regarding reorganization and winding up, what are the powers of (for the commencement and the management of this kind of measures): Description of the powers In what concerns the interim directors, please see paragraph 3.2 above. According the Insolvency Code and the Decree-Law 199/2006 the liquidator is responsible for (article 55.º, number 1 of the Insolvency Code): a) Prepare the payment of the debts of the bankruptcy assets using the amounts contained in the bankruptcy assets, namely the results of sale of assets contained in the bankruptcy assets; b) maintain and explore the insolvent company trying to avoid the worsening of its financial and economic condition; The liquidator is appointed by the courts and must act independently and with no conflict of interests in order to avoid personal liability before third parties. In the final stage of the insolvency, the courts shall be responsible to decide the destiny of the Bankruptcy assets. The national bank may appoint administrators and such administrators shall act according to the powers granted by the appointment made by the national bank (Bank of Portugal). Please be advised that in the winding-up proceedings, the national bank has the authority to decide upon the revocation of credit institution authorization. As stated previously, the Ministry of Finance can decide the nationalization of a credit institution. 16

18 - Formal reorganization measures and winding up rules For the execution of these measures (or the lack of decision to set these measures), what are the responsibilities of: Description of the responsibilities See previous paragraph 3.5 Group treatment The purpose of this paragraph is to determine if group of companies are treated in your Member state at an entity level or in a coordinated way (by the legislation or case law, in internal or cross border situations, for banks specifically or other companies). For the purpose of this paragraph, please consider that a group is constituted by a parent company and subsidiaries, not branches. -Is there any legislation or court practise that specifically apply to a group? No -Is there any special legislation or court practise that specifically apply to a banking group? No What is the definition of the group that can be treated in a coordinated or joint way? - The Portuguese Companies Code does not contain a definition of company group. In fact, under the category of colligated companies ( sociedades coligadas ) there are four different situations: a) Companies in a simple participation relationship, i.e. when a company owns 10% or more of the quotas or shares of another company (article 483, number 1 of the Commercial Companies Code); b) Companies in reciprocal participation relationships, i.e., when two companies simultaneously own 10% or more of the quotas or shares of the other company (article 485, number 1 of the Commercial Companies Code); c) Dominion relationship, i.e., when a company directly or indirectly can perform a dominant influence. According to the Portuguese law, one must assume that there is a dominant influence when (article 486, number 2 of the Commercial Companies Code): i) A company owns the majority of the share capital; ii) A company owns the majority of the voting rights of another company; 17

19 - Formal reorganization measures and winding up rules iii) A company has the possibility to appoint the majority of the members of the executive or supervision corporate bodies of another company; d) Group relationships, which include three different situations: i) Full dominion, which may occur upon the incorporation of a company (usually a company limited by shares ( sociedade anónima ) and the dominant is the sole shareholder of the company which incorporates. This incorporated company must be a company limited by shares ( sociedade anónima ). The full dominion relationship may occur also as result of the acquisition of more than 90% of the share capital of the company (articles 488 and 489 of the Commercial Companies Code); ii) Joint-group agreement ( grupo paritário ), i.e., an agreement that foresees that two companies without a relation may execute an agreement in order to submit themselves to a joint and sole direction (article 492 of the Commercial Companies Code); iii) Subordination agreement, i.e. an agreement subordinating the management of a company to another company (article 493 of the Commercial Companies Code). e) We must emphasize that these four situations are considered group relations. Nevertheless, only the relations described in paragraph d) may be defined as group relations stricto sensu. This happens due to the fact that, in these circumstances, it is created a corporate structure under the direction of a sole company. f) Group relations only verify when the concerned companies are limited liability companies ( sociedades por quotas ), limited company by shares ( sociedades anónimas ) and limited partnership with share capital ( sociedades em comandita por acções ) article 481.º, number 1 of the Commercial Companies Code. - In what concerns Banking law, the legal framework of credit institutions remits to the general rules of companies law in order to define companies groups. - However, it gives a broader definition of dominion relationship than the one foreseen in the Commercial Companies Code. - In fact under this particular framework, there is a dominion relationship when an individual or a legal entity (article 13, number 2, item a) of RGICSF): a) Owns the majority of the company s voting rights; b) Is a partner of the company and has the right to appoint or to remove more than half of the company s board of directors or supervisory bodies: c) Can implement a preponderant influence over the company, as a result of contract or clauses of the company s by-laws, d) Is partner of the company and control, per se, the majority of the voting rights as a result of entering into an agreement with the other companies partners; e) Owns a participation not lesser than 20% of the company s share capital, since it has not effectively performing a dominant influence or both of them are under the sole management. - Portuguese law does not foresee a definition of group interest. Nevertheless, in what concerns commercial companies capacities, Portuguese legislation foresees that it is contrary to the company s social object to act as a guarantor unless there is a justified interest of the guarantor company or if there is a dominion or group relation between the guarantor and the beneficiary of the guarantee (article 6, number 3 of the Commercial Companies Code). 18

20 - Formal reorganization measures and winding up rules - However, in what concerns banking law the rules governing financial assistance are developed. Therefore, it is forbidden to credit institutions to grant credit in any form, including acting as guarantor, directly or indirectly to companies or other legal entities directly or indirectly dominated. - This rule does not apply to operations where the companies involved are in the supervision perimeter in which the relevant credit institution is included. Is it possible to include solvent subsidiaries in the formal insolvency proceedings? Solvent subsidiaries can be indirectly affected by an insolvency proceedings Could you explain if the following measures are available in your Member state (please consider both purely internal situations and if a close notion exists in your Member state, please explain): -joint application -joint administrator -joint or coordinated proceedings -cooperation of insolvency administrators -joint reorganization plan -consolidation or pooling of assets -extension of liability -contribution orders -full/partial liability of majority owner/mother -Other practises that are in favour of group treatment Rules regarding recovery measures are construed to single credit institutions. Nevertheless it is possible to impose these measures to a banking group due to the fact that the RGICSF does not forbid such measures. 3.6 Cross border situations In a national context (when both the parent company and the subsidiaries are located in your Member state), do the reorganization and winding up proceedings apply to the subsidiaries? Do the systems you have described above apply to cross-border situations (on which legal basis, i.e territoriality or universal principles)? How would a cross border case be managed in the following cases: 19

21 - Formal reorganization measures and winding up rules - When the ailing bank in your Member state is the subsidiary of a parent company located in another Member state? According to article 26 of Decree-Law no 199/2006, when the Bank of Portugal considers that it is necessary the implementation of one or more recovery measures to branches of foreign credit institution, the Bank of Portugal should inform the competent authorities of the home country. There are no rules regarding subsidiaries. - When the ailing bank in your Member state is the parent company of one or several subsidiary located in another Member state? In these cases, the Bank of Portugal must adopt the recovery measures concerning the credit institutions with its head office in Portugal and to the respective branches, informing the authorities of the home state (articles 16 and 17.º of Decree Law no 199/2006) There are no rules regarding subsidiaries. - When the ailing bank in your Member state is the subsidiary of a parent company located in a third country? Bank of Portugal must inform the competent authorities of the states where the branches are located (article 26.º, number 1 of Decree-Law no 199/2006) There are no rules regarding subsidiaries. - When the ailing bank in your Member state is the parent company of one or several subsidiary located in a third country? Bank of Portugal must inform the competent authorities of the states where the branches are located (article 26.º, number 1 of Decree-Law no 199/2006) There are no rules regarding subsidiaries. Are there in your legislation specific reorganization/winding up proceedings created for cross border situations (please consider both subsidiaries and branches separately) The provisions foreseen in Decree-Law no 199/2006, as referred above. How does (or would) your national legislation deal with the cross-border aspects (are there situations where the Law of another Member state is applied) in the case of subsidiaries, not branches? 20

22 - Formal reorganization measures and winding up rules According to article 3.º, number 1 of the Commercial Companies Code, commercial companies have as personal law the Law of the State where its principal and effective head-office is located. In what concerns insolvency proceedings, the Insolvency Code states as a general principle that, except as otherwise foreseen in the Code, the insolvency proceeding and its effects are governed by the Law of the state where the proceeding is enforced (article 276 of the Insolvency Code). How does your court deal with a conflict with another Member states Law: when there is a divergence between both Laws, can an agreement be concluded under the control of your national judge? According to article 288, number 1 of Insolvency Code, the insolvency declaration in a foreign proceeding shall be acknowledged in Portugal except if: a) the court s competence or the competence of the foreign authority is not base on the rule set forth in article 7 (which states that the Court located in the head office of the insolvent company is competent to decide the case) or similar connection criteria; b) the acknowledgment conducts to a result contrary to the fundamental principles of the Portuguese juridical legal system; Is there any legal basis for cross border cooperation in reorganization measures or winding up proceedings at group level? Could you explain precisely which authorities actually cooperate under this legal basis and how? No Could you explain if the following measures are available in your Member state (please consider only cross-border situations, and if a close notion exists in your Member state, please explain): -joint application -joint administrator -joint or coordinated proceedings -cooperation of insolvency administrators -joint reorganization plan -consolidation or pooling of assets -extension of liability -contribution orders -full/partial liability of majority owner/mother 21

23 - Formal reorganization measures and winding up rules -Other practises that are in favour of group treatment: These measures are not expressly foreseen in the Portuguese legislation. 3.7 Efficiency of those proceedings Do you think the measures you have described above provide for optimal response in order to deal with problems in an ailing cross-border bank regarding: - The interest of the entity concerned? The interest of the entity concerned may be affected if recovery measures are imposed. Nevertheless, one must bear in mind that this system aims to protect the banking system and not a particular credit institution. - The interests of its creditors? Insolvency procedures have the risk of outstanding payments to the creditors. Nevertheless, the Portuguese legal system, due to the fact that foresees a wide scope of recovery measures can reduce such risk. - The interests of the deposit holders? The deposit holder may be affected if an insolvency occurs, due to the fact that the - The interest of shareholders Due to the fact that the Bank of Portugal may impose recovery measures, the shareholders can be affected. For instance, the Bank of Portugal may impose a different director than the one elected by the shareholders. - The interest of the employees Once the recovery measures do not prevent the payment of wages, such recovery measures do not affect the interest of employees. Do you think these measures can efficiently solve financial difficulties faced by a bank? Yes. It is a thorough system and with swift options to prevent potential insolvencies. Nevertheless, rules regarding banking groups could be adopted. 22

24 Are there changes recently adopted or being discussed in your legislation? No 4) Recent cases 4.1 Recent cases - pre-insolvency/early intervention measures Have you had any recent cases of pre-insolvency/early intervention measures applied to a credit institution (standalone, parent, subsidiary or branch) in your country? - Please provide examples of institutions which experienced difficulties or failures over the past 4 years in your country that required the implementation of pre-insolvency/early intervention measures? Not relevant - Did these credit institutions have branches in other member states? - Did these credit institutions have subsidiaries in other member states? - Briefly explain the case(s), the procedures followed, the results, the participating authorities, sources of financing N/A - Explain how the cross border elements were taken into consideration (cooperation of authorities, administrators etc) N/A 23

25 - Explain how and by which organisation decisions were made about the appropriate measures to implement. N/A - Explain how decisions were made (and by whom) on whether to implement the pre-insolvency/early intervention measures the credit institution. N/A - Are there things that you would have wanted to do, as part of pre-insolvency/early intervention that you were not able to do under the current legal framework? If so, what? N/A 4.2 Recent cases Reorganization and winding-up Have you had any recent cases of winding-up of a credit institution (standalone, parent, subsidiary or branch) in your country? - Which institutions had difficulties or failures over the past 4 years in your country that required the implementation of reorganization and winding-up? Banco Privado Português, S.A. is facing financial difficulties and can enter Insolvency proceedings; At this stage a recovery plan was presented by a finantial group (Orey Antunes), which is willing to buy Banco Privado Português for the amount of 1 and assuming all obligations of the Bank. The Portuguese state has opposed to this acquisition. Banco Português de Negócios, S.A. was nationalized following major gaps in its balance-sheet. The Bank of Portugal appointed interim directors and an audit is being made in order to the determine the amount of the financial losses At this stage, it has been communicated that the Portuguese state shall commence the sale process of Banco Português de Negócios, S.A. - Did these credit institutions have branches in other member states? 24

26 Banco Privado Português, S.A. has a branch in Spain, Banco Português de Negócios, S.A. has a branch in France. - Did these credit institutions have subsidiaries in other member states? Both of them - Briefly explain the case(s), the procedures followed, the results, the participating authorities and the sources of financing These cases are very recent. Banco Privado POrtuguês, S.A. is struggling to avoid the recovery measures of Bank of Portugal. Banco Português de Negócios is now stately-held and is developing audits to determine its financial health. The Portuguese state has announce that the sale procedure of Banco Português de Negócios, S.A. shall briefly commence. - Explain how the cross border elements were taken into consideration (cooperation of authorities, administrators etc) We do not have information on this particular issue - Explain how and by which organisation decisions were made about the appropriate measures to implement. Portuguese Government: nationalization of Banco Português de Negócios, S.A. Bank of Portugal: appointment of administrators in order to make audits to the accounts of Banco Português de Negócios - Explain how decisions were made (and by whom) on whether to reorganise or wind up the credit institution. Audits on Banco Português de Negócios are still being made. As far as we know, no decisions were taken on this particular issue.the Portuguese state has announce that the sale procedure of Banco Português de Negócios, S.A. shall briefly commence. 25